Skip to main content

Nixon Peabody LLP

  • People
  • Capabilities
  • Insights
  • About
Trending Topics
    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    Practices

    View All

    • Affordable Housing
    • Community Development Finance
    • Corporate & Finance
    • Cybersecurity & Privacy
    • Entertainment & Media
    • Environmental
    • Franchising & Distribution
    • Government Investigations & White Collar Defense
    • Healthcare
    • Intellectual Property
    • International Services
    • Labor, Employment, and Benefits
    • Litigation
    • Private Wealth & Advisory
    • Project Finance
    • Public Finance
    • Real Estate
    • Regulatory & Government Relations
    Industries

    View All

    • Aviation
    • Cannabis
    • Consumer
    • Energy
    • Financial Services
    • Healthcare
    • Higher Education
    • Infrastructure
    • Manufacturing
    • Nonprofit Organizations
    • Real Estate
    • Sports & Stadiums
    • Technology
    Value-Added Services

    View All

    • Alternative Fee Arrangements

      Developing innovative pricing structures and alternative fee agreement models that deliver additional value for our clients.

    • Continuing Education

      Advancing professional knowledge and offering credits for attorneys, staff and other professionals.

    • Crisis Advisory

      Helping clients respond correctly when a crisis occurs.

    • DEI Strategic Services

      Providing our clients with legal, strategic, and practical advice to make transformational changes in their organizations.

    • eDiscovery

      Leveraging law and technology to deliver sound solutions.

    • Environmental, Social, and Governance (ESG)

      We help clients create positive return on investments in people, products, and the planet.

    • Global Services

      Delivering seamless service through partnerships across the globe.

    • Innovation

      Leveraging leading-edge technology to guide change and create seamless, collaborative experiences for clients and attorneys.

    • IPED

      Industry-leading conferences focused on affordable housing, tax credits, and more.

    • Legal Project Management

      Providing actionable information to support strategic decision-making.

    • Legally Green

      Teaming with clients to advance sustainable projects, mitigate the effects of climate change, and protect our planet.

    • Nixon Peabody Trust Company

      Offering a range of investment management and fiduciary services.

    • NP Capital Connector

      Bringing together companies and investors for tomorrow’s new deals.

    • NP Second Opinion

      Offering fresh insights on cases that are delayed, over budget, or off-target from the desired resolution.

    • NP Trial

      Courtroom-ready lawyers who can resolve disputes early on clients’ terms or prevail at trial before a judge or jury.

    • Social Impact

      Creating positive impact in our communities through increasing equity, access, and opportunity.

    • Women in Dealmaking

      We provide strategic counsel on complex corporate transactions and unite dynamic women in the dealmaking arena.

    1. Home
    2. Insights
    3. Alerts
    4. New York state court rules that exercising an option to redeem a limited partners’ interests in a LIHTC partnership does not trigger a liquidation under the partnership agreement

      Alerts

    Alert / Commercial Litigation

    New York state court rules that exercising an option to redeem a limited partners’ interests in a LIHTC partnership does not trigger a liquidation under the partnership agreement

    Jan 22, 2020

    LinkedInX (Twitter)EmailCopy URL

    By Louis Dolan, Jr.

    In a recent, unpublished decision from a New York state trial court, a judge ruled that a general partner’s exercise of an option to redeem a limited partners’ interest in a low-income housing tax credit partnership did not trigger a liquidation under the partnership agreement allowing for repayment of the limited partners’ capital accounts.

    DOWNLOAD

    NYS Court LIHTC decision (PDF)

    On January 7, 2020, Judge Deborah A. Chimes of the New York Supreme Court—Erie County in Centerline/Fleet Housing Partnership, L.P. v. Hopkins Court Apartments, L.L.C., et al., No. 812426 (N.Y. Sup. Ct. 2016) ruled from the bench that a general partner’s election to redeem the limited partners’ interests in a low-income housing tax credit partnership did not trigger liquidation provisions under the partnership agreement because the partnership still owned all, or substantially all, of the assets of the partnership. Thus, in effect, exercise of the option by redeeming interests, rather than by acquiring title to the property, did not require repayment of the limited partners’ capital accounts.

    The investor limited partner and special limited partner filed suit against the general partner for breach of the partnership agreement, breach of fiduciary duty, and other claims arising out of the general partner’s decision to undertake a refinancing transaction without first obtaining consent, and the general partner’s exercise of an option to redeem the limited partners’ interests in the partnership after the end of the compliance period without treating it as a liquidation (which would have required return of the limited partners’ capital accounts).

    Although the partnership agreement apparently delegated significant authority to the general partner to “sell, lease, exchange, refinance[,] or otherwise transfer, convey, or encumber all or substantially all of the assets of the [p]artnership,” it still required the general partner to obtain prior consent of the special limited partner. At the same time, however, the general partner had the right to refinance the partnership’s assets without the special limited partners’ consent where the terms and conditions of the new loan were “substantially similar” to the original loan. The partnership agreement also included a “waterfall” provision that described how proceeds from a sale or refinancing transaction were to be applied. The general partner would receive 70% of the proceeds, while the remaining 30% would be allocated to the limited partners.

    The limited partners alleged the general partner breached the partnership agreement by undertaking a refinancing without first obtaining consent. They claimed the new refinancing terms were far from “substantially similar” to the terms of the original loan. This, in turn, resulted in an alleged breach of fiduciary duty because the refinancing left the partnership with “insufficient equity to repay capital account balances upon a final liquidation” in light of the general partner’s subsequent redemption of the limited partners’ interests in the partnership. The option agreement provided that the general partner could either “purchase” the property or “reform” the option agreement to a redemption of the limited partners’ interests in the partnership. The “redemption price” would “equal the amount otherwise payable to the limited partners” if the property were sold to a third party based, in part, on the property’s “fair market value” i.e., a “hypothetical sale.” The option agreement required that the economic consequences of the transaction on the limited partners be materially similar whether the transaction was an acquisition of the property or a redemption of the interests.

    At the motion’s hearing, one of the issues before the court was which section of the partnership agreement governed the distribution of the redemption proceeds. As part of the analysis, the parties, along with the court, treated the redemption as a “hypothetical sale” because, as the court noted, the limited partner was “not relinquishing its ownership” interest in the property, but rather its interest “as a limited partner in the ultimate partnership[.]” Within this context, the limited partners argued that the redemption should be governed by the partnership agreement’s liquidation provisions because even though the general partner elected to redeem interests instead of acquiring the property, such a redemption, treated as a hypothetical sale, would constitute a “sale or other disposition of all or substantially all of the assets of the [p]artnership.” The general partner, on the other hand, argued that the distribution provisions pertaining to a refinance should apply, which would not take into account the limited partners’ capital accounts.

    The court ultimately agreed with the general partner. Initially, the court found that the option agreement was “unambiguous on the issue of which section applie[d] to the distribution of proceeds” following the redemption, explaining that “in exercising the option, the price defendants would pay plaintiffs for their interest is equal to the amount plaintiffs would receive if the [property] was sold at fair[-]market value, or what the parties refer to as a hypothetical sale.” The court then rejected the limited partners’ contention that the liquidation provisions should apply because, the court ruled, the partnership “still own[ed] all of, or substantially all, of the assets of the partnership.” The court therefore held that the distribution provisions of the partnership agreement applied to the “hypothetical sale used to establish the value of the plaintiffs’ interest” as part of the redemption process and that “the waterfall provisions contained therein appl[ied] to the distribution of proceeds from the redemption of the plaintiffs’ interest in the partnership.” In effect, the court ruled that the election by the general partner to redeem the interests of the limited partners, rather than acquire title to the property, had very different economic consequences for the partners, despite language in the option agreement seemingly negating that result and requiring that the limited partners’ tax and economic consequences be materially similar regardless of whether a redemption or property sale was chosen.

    The court declined to dismiss the limited partners’ breach of fiduciary duty claim against the general partner because whether the general partner’s “actions with respect to the [] re-financ[ing] [were] fair as to all concerned” remained “a question of fact” for the jury.

    Although the trial court’s unpublished decision is not binding precedent and remains subject to appeal, Centerline/Fleet Housing nonetheless provides a glimpse into how a state court may view a redemption of a limited partner’s interest under the specific language at issue in this case.

    Practices

    Affordable HousingCommunity Development FinanceComplex Disputes

    Insights And Happenings

    • Alert

      Pennsylvania state housing tax credit program signed into law

      Nov 5, 2020
    • Alert

      New IRS rule on amended returns can affect LIHTC partnerships

      April 14, 2020
    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

    Subscribe to stay informed of the latest legal news, alerts, and business trends.Subscribe

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    • Cookie Preferences
    • Privacy Policy
    • Terms of Use
    • Accessibility Statement
    • Statement of Client Rights
    • Purchase Order Terms & Conditions
    • Nixon Peabody International LLC
    • PAL
    © 2025 Nixon Peabody. All rights reserved